Downside to consumer rebound: Savings lag

Gains in consumer spending aren’t improving savings accounts

Consumers are getting their mojo back again, except in one key area: Their savings.

New data shows that consumer spending and personal income are rising. But, experts say, that confidence comes at a price. “The majority of Americans are woefully under-saved for both emergencies and retirement and they know it,” says Greg McBride, a senior financial analyst at Bankrate.com, a personal-finance research and publishing company. “Only one in four Americans has an adequate savings account to cover six months of expenses.”

Bankrate’s Financial Security Index, a survey of consumers’ well-being, hit 101.5 in March, reaching its highest point since it began in December 2010, according to results released Monday. In the monthly survey, a higher percentage of people said they felt “more comfortable” about job security, debt, net worth and overall financial situation than said they felt “less comfortable.” But savings bucked the trend: Some 31% of people said they were “less comfortable” with the amount of savings they have compared with a year ago, while only 19% say they’re “more comfortable” than a year ago. Of those making less than $75,000 a year, 36% are less comfortable with their savings. “It’s the only area of their personal finances where more people consistently feel worse rather than better,” McBride says.

The Bankrate report arrives on the heels of other data that shows U.S. savings rates languishing near historic lows. The rate peaked at around 12% of personal disposable income in the early 1970s and 1980s, according to the Bureau of Economic Analysis, but it took on a downward trajectory for the next few decades —— bottoming out at around 1% in 2001 and again in 2005. Last December, the savings rate spiked at 6.4% temporarily before falling back to 2.4% in January.

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Why the volatility? “The December personal saving rate was a fluke,” says Sheldon Garon, professor of history at Princeton University and author of “Beyond Our Means: Why America Spends While the World Saves.” The spike was boosted by company bonuses and dividends being brought forward to the end of 2012, he says, to avoid 2013 increases in tax rates.

And the low savings rate isn't because Americans haven’t learned the lessons of the 2008 recession. “Their income is flat and expenses continue to increase,” McBride says. “Many don’t have the capacity to save.” Most working people are also facing higher payroll taxes this year, though many are shrugging them off: 48% of those surveyed said they hadn’t noticed the higher payroll taxes that began on Jan. 1, according to Bankrate.com, and 7% say they’ve been unaffected. (For more, see: Social Security taxes begin to bite.)

Another reason savings are dwindling: people can only drive old jalopies to work or do battle with broken kitchen equipment for so long. “Instead of replacing things, we’ve been repairing and stretching out their useful life,” says Scott Hoyt, senior director of consumer economics at Moody’s Analytics. “There’s a lot of pent-up demand. What a year ago was a want has now become a need.”

On the upside, unlike the Great Recession — which was fueled by a property bubble — consumers who are dipping into their savings or taking on debt now may be doing so at an opportune time, studies suggest. For instance, interest rates and home prices are still relatively low. Existing-home sales rose 0.8% to 4.98 million in February, the highest level since November 2009, the National Association of Realtors said last week.

Still, low savings may pose a bigger problem for those planning to retire. Americans’ confidence in their ability to afford a comfortable retirement remains low, according to a report last week from the Employee Benefit Research Institute in Washington, D.C. More than half (57%) report less than $25,000 in total household savings and investments, the report says.

In the meantime, the savings rate is unlikely to rise substantially anytime soon, experts say. “Lower and middle income households have shown few signs of saving much more since 2008,” Garon says. Looking ahead, McBride expects the saving rate to stay at around 3% this year.

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